The Mortgage Carrot
What can an extra $1,000 dollars per month do for you?
Let’s assume you invest the $1,000 per month savings back into your mortgage over a twenty-year period with an average interest rate of 6 per cent. Your extra savings contribution during this time would be $240,000. Not only would you repay your mortgage faster, you would also save $218,100 in interest. That’s the power of compounding!
You will have $458,000 extra to support you during the flexibility stage of life.
The Investment Carrot
Now let’s assume you invest the $1,000 per month savings back into the property market over a twenty-year period.
This saving would enable you to invest an extra $600,000 into the property market because the monthly holding costs after tax would be around $1,000 per month.
You borrow the full purchase price plus costs so we’ll assume you have a loan size of $630,000. The average interest rate is 6 per cent, rental yield is 4 per cent, holding costs are 1.5 per cent and you are on the top nominal tax rate. History suggest that due to inflation and market forces, rental income is predicted to increase, and the property will become positively geared over time.
Therefore the $1,000 required to commit to the property from your Money Management Savings would reduce over time, or it could be diverted to paying down your mortgage or investing into another property. In this example however, we’ll ignore the cash flow benefits from the investment, and assume that the improved cash flow was spent on your lifestyle – rather than savings, and only look at the capital growth outcomes.
If we assume an average capital growth of 6 per cent over the 20 years, the value of the property will grow to $1,924,281.
As Albert Einstein reflected, “That is the power of compounding!” “It’s the eighth wonder of the world!” You’ll have $1,294,281 extra equity to support you during your flexible stage of life.
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